Sunday, April 28, 2013

Market LookBeck II

(Reuters) - The dollar dropped on Friday to its lowest against the yen in more
than a week after the Bank of Japan left policy unchanged and data showed the
U.S. economy expanded more slowly than expected in the first quarter.

The
dollar was on pace to notch its largest daily percentage

loss against the
yen since April 15 as a confluence of factors, both technical and fundamental,
came into play.

The BoJ held off from announcing new monetary initiatives
on Friday, while policymakers were divided over whether the central bank can
meet its target for 2 percent inflation in two years.

"Dollar/yen
continues to react to what happened overnight and while the BoJ did not
surprise, two of the board members said it would be hard to reach the 2 percent
inflation target and that put (upward) pressure on the yen," said Charles
St-Arnaud, forex strategist at Nomura Securities in New York.

"Then, we
had the weak GDP data, signaling underperformance in the U.S. and that led to
short covering," he said.

U.S. gross domestic product expanded at a 2.5
percent annual rate, the Commerce Department said on Friday, after growth nearly
stalled at 0.4 percent in the fourth quarter. The increase, however, missed
economists' expectations for a 3.0 percent pace.

U.S. government bond
yields, which move inversely to price, fell after the GDP data as it stoked bets
the Federal Reserve might consider more stimulus at its policy meeting next
week.

"That drop in yields was also a big driver of the dollar/yen trade
today," St-Arnaud said. "The selling started to feed on itself and everyone
started to jump on the selling bandwagon."

The dollar last traded at
98.26 yen, down 1 percent on the day. It hit a session low of 97.54, its lowest
since April 17. The pressure pushed the dollar through technical support levels
and added to the drop.

Dollar/yen "price has traded below the eight-day
exponential moving average," said Christopher Vecchio, currency analyst at
DailyFX in New York. "And the diagonal support for the Bullish Ascending
Triangle has given way amid a break in the daily relative daily strength
index."

Some US$3.3 billion in yen changed hands on Reuters Dealing on
Friday compared with US$3.7 billion the same day a week ago. The dollar drop
also left the U.S. currency further away from a four-year high of 99.94 yen
touched on April 11.

Aggressive monetary stimulus announced by the BoJ in
early April triggered a sharp sell-off in the yen, but traders and analysts said
the fact that the dollar had not breached 100 yen left it vulnerable to a
pullback.

"The failure at 100 yen has focused people's minds on whether
they may have been too optimistic on the near-term prospects for the yen," said
Jane Foley, Rabobank senior currency strategist in London.

"Today's
inflation data suggested the market may have got ahead of itself in its optimism
that monetary stimulus will create enough activity in the economy to push up
inflation."

Data showed the fifth straight month of annual declines in
Japanese core consumer prices in March, despite the weaker yen.

Next week
ushers in a slew of events and data, including Federal Reserve and European
Central Bank policy meetings and key U.S. employment data.

"Some people
were hoping for a strong U.S. GDP number given stagnation in Asia and the euro
zone, with the U.S. one of the bright spots," said Amanda Chow, forex strategist
at CitiFX, a division of Citigroup, in New York. "But with the number coming in
lower than expected, it was a slight disappointment."

"We still expect
the yen to continue to weaken in the medium term because of economic
fundamentals and the fact that the BoJ is determined to do whatever it takes to
reach its 2 percent inflation target," she said. "The GDP data, while weaker
than expectations, may not be enough to warrant a reaction from the Fed although
that remains to be seen at next week's FOMC meeting."

The euro,
meanwhile, was expected to stay under pressure in the coming days on
expectations the ECB will cut rates next week to support the euro zone's fragile
economy.

The euro last traded at $1.3023, up 0.1 percent on the day,
according to Reuters data.

For the week, the dollar fell 1.2 percent
against the yen, its worst week since the period ending June 3, using Reuters
data. The euro fell 0.2 percent against the dollar, its second straight week of
declines.